Jenkins Services reported the following balances
December 31, 2016 December 31, 2015
Net Income $ 45,000 $ 42,000
Preferred Dividends 5,000 3,000
Total Stockholders' Equity 375,000 368,000
Total Stockholders' Equity attributable to Preferred Stock
40,000
24,000
Number of common Shares Outstanding
16,000
12,000
Compute earnings per share for 2016, price/earnings ratio for 2016, assuming the market price on December 31, 2016 is $37.50 per share, and the rate of return on common stockholders' equity for 2016.
(Show your computations and round to two decimal places.)
What will be an ideal response
Average number of common shares outstanding: (16,000 + 12,000 ) / 2 = 14,000
Earnings Per Share = (Net income - Preferred dividends)/Average number of common shares outstanding
Earnings Per Share = ($45,000 - $5,000 ) / 14,000
Earnings Per Share = $2.85
Price/earnings ratio = Market price per share of common stock / Earnings per share
Price/earnings ratio = $37.50 / $2.85 = 13.18
Rate of return on common stockholders' equity:
Common stockholders' equity:
2016: Total stockholders' equity $375,000 less total stockholders' equity attributable to preferred stock $40,000 = $335,000
2015: Total stockholders' equity $368,000 less total stockholders' equity attributable to preferred stock $24,000 = $344,000
(Net income - Preferred dividends) / Average common stockholders' equity
($45,000 - $5,000 ) / ($335,000 + $344,000 ) / 2
$40,000 / $339,500 = 11.78%
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